Wipe state taxes for a $1.7bn boon

An Allen Consulting Group finds that consumption tax should play a part in wiping out inefficient state taxes.
Photo: Louie Douvis

Slashing the most inefficient state taxes would increase gross domestic product by nearly 2 per cent and leave the nation $500 million better off each year.

Coupled with new or increased broader-based taxes – potentially a bigger consumption tax – the changes could bring a fiscal boon of $1.7 billion a year.

Detailed in an 87-page report by the Allen Consulting Group, the findings bolster arguments ahead of the Tax Forum next week that consumption tax should play a part in wiping out inefficient state taxes.

The Business Coalition for Tax Reform, which commissioned the report, said states were overreliant on taxes it labelled as dead-weight, unfair, costly and volatile.

“Inefficient state business taxes are volatile and unpredictable revenue sources which are difficult and costly to manage, unequally applied and harmful to business competitiveness,” said coalition chair, Woolworths finance director Tom Pockett.

Members of the coalition come from a broad cross-section of business interests. They include the Aust­ralian Institute of Company Directors, Business Council of Australia, Financial Services Council and Minerals Council of Australia.

While goods and services tax is off the Tax Forum agenda, the government will not stop people from speaking about it – but it has ruled out any change.

Mr Pockett said a shift from inefficient to efficient taxes could create gains for the economy.

According to the report, after accounting for efficiency gains from the abolition of taxes a $16.4 billion revenue shortfall would remain.

An extra $17 billion to fund the shortfall could come from a new broad-based consumption tax of 3 to 3.5 per cent, or 12 per cent if it replaced the GST. As it is not “GST”, it is not explicitly “off the table”, the report notes. The same amount could otherwise be raised by a cash flow tax – Ken Henry’s way around the GST ban – of 3 to 4 per cent; a GST rise to 14 per cent; or a share in a 3 per cent income tax rise. Alternatively, payroll tax, as “one of the more efficient state taxes”, could fund the scrapping of other state taxes. The aim of canvassing the options, the report notes, is to “stimulate debate as to the merits”.

Additional money raised could fund income tax cuts and compensation for disadvantaged groups.

The report notes that state tax reform has stalled, despite widespread agreement of its necessity.

It warns any changes would have to include a strong governance framework, to stop states from “back­sliding” and reintroducing bad taxes.

Mr Pockett will represent the coalition at the Tax Forum next week.

The coalition’s deputy chair Frank Drenth said an increased GST would hit the pockets of higher income households harder, contrary to arguments about its regressive nature.

The Henry review found that “more than one-third of the $5 billion exemption for GST-free food benefits households in the highest 20 per cent of the income distribution”.

The coalition has called for a 10-year reform plan, using the Henry report as a “blueprint”, and a new independent tax reform body stacked with government, business and community representatives.

Such an independent body would “take the heat out” and de-politicise the debate, said Mr Drenth.

While the government douses demands for a GST change, it battles another front set to infiltrate the forum: overhauling alcohol tax.

Finance Minister Penny Wong has reiterated the government’s position that it will not overhaul Australia’s alcohol taxation system while the nation’s winemakers are dealing with a wine glut in the industry.

“We are seeing a very significant restructure in the wine industry at the moment,” Senator Wong said.

“We don’t believe this is the time to be looking to additional changes of taxation regime.”

Anti-binge drinking campaigners yesterday released new research, which claimed to debunk warnings by the Winemakers Federation of Australia that wine tax reform would cause a 34 per cent plunge in production and the loss of up to 12,000 jobs.

Modelling by the left-leaning think tank, The Australia Institute, found moving wine to a volumetric tax would result in a fall in production of 5.2 per cent and the loss of 600 jobs.